"There are only so many customers, so it is truly like musical chairs. But there are opportunities out there," Rubin says. "Where there is despair, there is glee because it is a two-sided ledger."

If there is any good news, it is that net servicing income increased to $355 per loan in the fourth quarter, compared with $224 in the third quarter and $89 a year earlier.

Some lenders are subsidizing their originations costs with the potential income they can make from mortgage servicing rights.

During a panel discussion at the recent Regional Conference of Mortgage Bankers Associations meeting in Atlantic City, N.J., Stanley Middleman, president and CEO of Freedom Mortgage, Mount Laurel, N.J., and Peter Norden, CEO of HomeBridge Financial Services, Iselin, N.J., discussed different business models. Norden is running his origination shop lean, cutting costs to meet the new environment to keep production profitable. Freedom, on the other hand, is looking to acquire MSRs, so it is willing to write loans at a loss.

If all business lines are included, 58% of mortgage lenders made a pretax profit in the quarter, down from 74% in the third quarter.

Companies began to suffer margin compression in the middle of last year. As in the past, as rates rose and refinancings started to dry up, lenders started to drop their prices, noted Regina Lowrie, president and CEO of consulting firm RML Investments Inc., Blue Bell, Pa.

In the fourth quarter, most mortgage bankers started taking steps to prepare for the qualified mortgage and ability-to-repay rules, which took effect on Jan. 10.

The environment has switched from too big to fail to "too small to comply," Lowrie says. Companies began to increase compliance staff to deal with the new rules and that helped to increase the net cost to originate to $5,171 per loan in the fourth quarter from $4,573 in the third quarter.

Back office productivity has also been slowed by the new rules put in place. It is taking more time, with more expense involved to originate a loan as the market gets more competitive, she says.

Productivity fell to two loans per production employee per month in the quarter, down from 2.5 in the third quarter. Personnel expenses averaged $4,385 per loan, up from $4,130.

A third factor behind the lower profitability is the mix of loan types being produced, says Rick Sharga, an executive vice president with Auction.com, Irvine, Calif.

Refinancings, and in particular Home Affordable Refinance Program loans, cost less to originate than purchase loans. And the costs to do purchase loans have increased because of the added paperwork since the end of the crisis.

Fourth quarter loan production costs increased by almost the same amount of money as the decrease in profits, which Sharga says could be "too simplistic of an equation but I think it is hardly coincidental."

There are other things that are not covered in the report, including the cost of funds to originate each loan, which also has an impact on profitability, he says.